Corporate risk-taking and national governance quality: Empirical evidence from MENA emerging markets

Figures & data

Table 1. Summary statistics and variable definitions

Panel A. National Governance Indices and Subindices
Voice and Accountability	5080	−1.00	−0.92	0.56	−1.91	0.30
Political Stability and Absence of Violence/Terrorism	5080	−0.15	−0.37	0.57	−1.34	1.22
Government Effectiveness	5080	0.21	0.11	0.41	−0.30	1.51
Regulatory Quality	5080	0.14	0.06	0.35	−0.51	1.11
Rule of Law	5080	0.25	0.19	0.27	−0.25	0.96
Control of Corruption	5080	0.17	0.09	0.41	−0.44	1.41
Overall index (NGI)	5080	−0.06	−0.17	0.30	−0.48	0.68
Panel B. Firm-level variables
Cash Flow Volatility CFV	4360	0.03	0.02	0.04	0.00	1.11
Z-score	4352	19.12	18.12	27.52	−18.01	323.25
Leverage	4162	0.24	0.21	0.21	0.00	0.84
Tangibility	3790	0.70	0.68	0.42	0.00	2.84
Firm Age	5080	27.33	24.00	15.55	8.00	57.00
Market-to-book ratio	4562	1.36	1.19	0.56	0.72	2.47
Size	4596	18.70	18.76	1.95	11.77	28.26
Dividends	5080	0.61	1.00	0.49	0.00	1.00
Profitability	4862	0.56	0.59	0.30	−6.11	1.00
Panel C. Variable Definition
Voice and Accountability	capturing perceptions of the extent to which a country’s citizens can participate in selecting their government, as well as freedom of expression, freedom of association, and free media.
Political Stability and Absence of Violence/Terrorism	capturing perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including politically motivated violence and terrorism.
Government Effectiveness	capturing perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies.
Regulatory Quality	capturing perceptions of the ability of the government to formulate and implement sound policies and regulations that permits and promotes private sector development.
Rule of Law	capturing perceptions of the extent to which agents have confidence in and abide by the rules of society and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence.
Control of Corruption	capturing perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as the capture of the state by elites and private interests.
Overall index (NGI)	The composite score includes the six dimensions of governance presented above which go from approximately −2.5 (weak) to 2.5 (strong) (Kaufmann et al., 2011).
Cash flow volatility CFV	The standard deviation of cash flow to asset ratio over the entire study period Harris et al., 2019; Bates et al., 2009). The cash flow presents earnings before interest and tax (Ruback, 2002).
Z-score	The sum of the return on assets ratio plus the capital asset ratio is divided by the standard deviation of the return on assets ratio over the entire sample period (Díez-Esteban et al., 2019).
Leverage	The total debt is scaled by total assets.
Tangibility	The ratio of tangible fixed assets to total assets.
Firm age	The total number of years in corporations.
Market-to-Book ratio	The sum of the equity market value plus the debt book value is divided by the sum of the book values of equity and debt.
Size	The natural logarithms of the firm’s market capitalization.
Dividends	The dummy variable equals 1 for dividends paying company and 0 otherwise. Dividends reflect the organization’s constraints to undertake new projects.
Profitability	The firm’s operating margin before depreciation (Harris & Roark, 2019).

This table reports descriptive statistics of the entire sample of the MENA region, and definitions of the variables used in the analysis.

Table 2. Correlation matrix and variance inflation factor VIF

	CFV	VAE	PVE	GEE	RQE	RLE	CCE	Overall index (NGI)	Leverage	Tangibility	Fage	MTB	Size	Dividends	Profitability	VIF
CFV	1.00
VAE	0.06***	1.00														2.44
PVE	0.07***	0.08***	1.00													2.46
GEE	0.01*	0.22***	0.62***	1.00												1.39
RQE	0.04***	0.32***	0.69***	0.83***	1.00											2.66
RLE	0.01*	0.17***	0.70***	0.75***	0.83***	1.00										2.65
CCE	0.03**	0.18***	0.63***	0.94***	0.78***	0.79***	1.00									1.35
Overall index (NGI)	0.07***	0.11***	0.83***	0.86***	0.82***	0.85***	0.87***	1.00								2.50
Leverage	0.09***	−0.01	−0.01	−0.02	−0.05***	−0.01	−0.00	−0.02	1.00							2.82
Tangibility	0.01*	−0.13***	−0.12***	−0.01	−0.01	−0.03**	0.01	−0.09***	0.08***	1.00						1.12
Firm age	−0.03*	0.10***	−0.10***	−0.07***	−0.13***	−0.19***	−0.11***	−0.10***	−0.06***	0.08***	1.00					1.13
MTB	0.13***	−0.15***	−0.14***	−0.12***	−0.15***	−0.18***	−0.12***	−0.21***	−0.08***	0.13***	0.05***	1.00				1.36
Size	−0.16***	−0.46***	0.18***	0.24***	0.18***	0.12***	0.20***	0.07***	−0.03**	0.08***	−0.00	0.38***	1.00			1.76
Dividends	−0.20***	−0.01	0.06***	0.06***	0.07***	0.05***	0.04***	0.06***	−0.20***	0.02	0.17***	0.19***	0.34***	1.00		1.22
Profitability	0.27***	−0.14***	0.03*	0.06***	0.13***	0.13***	0.07***	0.04***	0.78***	0.01	−0.01	−0.01	0.02	0.18***	1.00	2.87

Note: due to space limitations, national governance variables were written in its short labels, voice, and accountability (VAE), political stability (PVE), government effectiveness (GEE), regulatory quality (RQE), rule of law (RLE), and control of corruption (CCE). *Significant at the 10% level; **significant at the 5% level; ***significant at the 1% level. See, Table 1 for variable definitions.

Table 3. Explaining the relationship between cash flow volatility and national governance quality in the MENA region

	(1)		(2)		(3)		(4)		(5)		(6)		(7)
Dependent variable	CFV		CFV		CFV		CFV		CFV		CFV		CFV
	b	(z)	b	(z)	b	(z)	b	(z)	b	(z)	b	(z)	b	(z)
Voice and accountability	0.019	(1.013)
Political stability			0.025**	(2.519)
Government effectiveness					0.029*	(1.786)
Regulatory quality							0.027	(1.533)
Rule of law									0.033*	(1.508)
Control of corruption											0.026*	(1.572)
Overall index (NGI)													0.029**	(1.654)
Leverage	0.325***	(2.893)	0.313***	(3.240)	0.295***	(2.971)	0.296***	(3.047)	0.307***	(3.057)	0.309***	(2.985)	0.311***	(3.157)
Tangibility	−0.028	(−0.677)	−0.003	(−0.071)	−0.003	(−0.074)	−0.003	(−0.074)	−0.004	(−0.110)	−0.006	(−0.131)	−0.003	(−0.067)
Firm age	0.000	(0.921)	0.000	(1.112)	0.000	(1.192)	0.000	(1.161)	0.000	(0.989)	0.000	(1.106)	0.000	(1.199)
MTB	0.039	(1.371)	0.046*	(1.747)	0.046	(1.538)	0.039	(1.538)	0.056**	(2.058)	0.052*	(1.666)	0.049*	(1.765)
Size	−0.027**	(−2.412)	−0.029***	(−3.546)	−0.032***	(−2.941)	−0.029***	(−3.102)	−0.031***	(−3.551)	−0.032***	(−3.016)	−0.030***	(−3.418)
Dividends	−0.040*	(−1.797)	−0.043**	(−2.123)	−0.044**	(−2.063)	−0.047**	(−2.276)	−0.037*	(−1.705)	−0.040*	(−1.837)	−0.040*	(−1.932)
Profitability	−0.266***	(−5.465)	−0.263***	(−6.636)	−0.269***	(−5.646)	−0.257***	(−6.163)	−0.270***	(−6.129)	−0.275***	(−5.528)	−0.272***	(−6.056)
Intercept	−0.161	(−0.849)	−0.235	(−1.574)	−0.272	(−1.478)	−0.240	(−1.428)	−0.252	(−1.623)	−0.214	(−1.589)	−0.269	(−1.325)
Number of observations	2774		2774		2774		2774		2774		2774		2774
Wald χ2 statistic	85.899***		121.224***		86.905***		100.983***		96.099***		152.934***		174.167***
Number of instruments	32		32		32		32		32		32		32
Number of clusters	459		459		459		459		459		459		459
AR (1) (p-value)	0.006		0.003		0.007		0.005		0.006		0.007		0.005
AR (2) (p-value)	0.218		0.217		0.208		0.209		0.220		0.210		0.213
Hansen-J test (p-value)	0.133		0.131		0.125		0.124		0.154		0.132		0.131

Note: This table reports empirical evidence on the relationship between national governance and corporate risk-taking using the entire sample of the MENA region nonfinancial listed firms. Specifically, it presents the estimation of Eq.(1)(1) ${\gamma }_{i,t}={\beta }_0+\alpha X_{j,t}+\phi M_{i,t}+{\mu }_i+{\eta }_i+\hspace{0.17em}{\in }_{i,t}$(1) using an alternative measure of national governance dimensions. The variables are as defined in Table 1. Following Baum (2013) we apply Durbin–Wu—Hausman (DWH) to test the endogeneity of all regressors, and the test report that we cannot accept a null hypothesis at any conventional level of significance, suggesting that system GMM will be best in alleviating endogeneity issues in our data compared to other estimators. Standard error in parentheses; *significant at the 10% level; **significant at the 5% level; ***significant at the 1% level.

Table 4. National governance and corporate risk-taking: The Z-score FE regression

	(1)	(2)	(3)	(4)	(5)	(6)	(7)
Dependent variable	Z-score	Z-score	Z-score	Z-score	Z-score	Z-score	Z-score
	Coef. /(t)	Coef. /(t)	Coef. /(t)	Coef. /(t)	Coef. /(t)	Coef. /(t)	Coef. /(t)
Voice and accountability	0.009
	(0.886)
Political stability		0.004*
		(1.88)
Government effectiveness			0.015***
			(2.789)
Regulatory quality				0.002
				(0.219)
Rule of law					0.003*
					(2.24)
Control of corruption						0.010**
						(2.142)
Overall index (NGI)							0.014*
							(1.665)
Leverage	0.103***	0.103***	0.103***	0.103***	0.103***	0.103***	0.103***
	(2.674)	(2.682)	(2.688)	(2.681)	(2.684)	(2.682)	(2.684)
Tangibility	0.003	0.003	0.003	0.003	0.003	0.003	0.003
	(0.893)	(0.884)	(0.882)	(0.899)	(0.901)	(0.877)	(0.897)
Firm age	0.000	0.000	0.000	0.000	0.000	0.000	0.000
	(0.722)	(0.726)	(0.690)	(0.697)	(0.697)	(0.690)	(0.691)
MTB	0.014***	0.014***	0.014***	0.014***	0.014***	0.014***	0.014***
	(4.731)	(4.705)	(4.713)	(4.715)	(4.683)	(4.727)	(4.680)
Size	−0.004***	−0.004***	−0.004***	−0.004***	−0.004***	−0.004***	−0.004***
	(−4.341)	(−4.447)	(−4.476)	(−4.418)	(−4.454)	(−4.430)	(−4.453)
Dividends	−0.006**	−0.006**	−0.006**	−0.006**	−0.006**	−0.006**	−0.006**
	(−2.236)	(−2.277)	(−2.158)	(−2.242)	(−2.230)	(−2.170)	(−2.191)
Profitability	−0.109**	−0.109**	−0.109**	−0.109**	−0.109**	−0.109**	−0.109**
	(−2.406)	(−2.413)	(−2.420)	(−2.413)	(−2.415)	(−2.418)	(−2.416)
Intercept term	0.211***	0.194***	0.195***	0.202***	0.200***	0.200***	0.203***
	(5.520)	(4.485)	(4.517)	(4.792)	(4.643)	(4.547)	(4.610)
Year fixed effect	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Industry fixed effect	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Country fixed effect	Yes	Yes	Yes	Yes	Yes	Yes	Yes
R-squared	0.3971	0.3971	0.3987	0.3967	0.3967	0.3978	0.3972
# Of. Obs.	2774	2774	2774	2774	2774	2774	2774
# Of firms.	459	459	459	459	459	459	459

Note: This table reports empirical evidence on the relationship between national governance and corporate risk-taking estimating Eq.(1)(1) ${\gamma }_{i,t}={\beta }_0+\alpha X_{j,t}+\phi M_{i,t}+{\mu }_i+{\eta }_i+\hspace{0.17em}{\in }_{i,t}$(1) Using FE regression with adjusted standard error. Column 1–7 estimating the effect on Z-score as an alternative estimate of firm’s risk-taking. Variables are as defined in Table 1. Standard error in parentheses; *significant at the 10% level; **significant at the 5% level; ***significant at the 1% level

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